OncoCyte Corp

NASDAQ:OCX

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to the OncoCyte Q2 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]

Please note this event is being recorded. I would now like to turn the conference over to Stephanie Prince from PCG Advisory. Please go ahead.

[Stephanie Prince, PCG Advisory, IR]

Thank you, Anthony. And thank you to everyone for joining us for today’s conference call to discuss OncoCyte’s second quarter 2023 financial results and recent operating highlights. If you have not seen today’s financial results press release, please visit the company’s website on the Investors page.

Before turning the call over to Josh Riggs, OncoCyte’s President and Chief Executive Officer, I would like to remind you that during this conference call the company will make projections and forward-looking statements regarding future events. Any statements that are not historical facts are forward-looking statements.

We encourage you to review the company’s SEC filings, including, without limitation, the company’s 10-K and 10-Qs, which identify the specific risk factors that may cause actual results or events to differ materially from those described in these forward-looking statements.

Actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. OncoCyte expressly disclaims any intent or obligation to update these forward-looking statements except as otherwise may be required under applicable law.

With that, I will turn the call over to Josh. Josh?

[Josh Riggs, President and CEO]

Thanks, Stephanie. And welcome everyone to our conference call to discuss our second quarter 2023 highlights. In the first half of 2023, OncoCyte shifted to a capital light product-focused commercial model, significantly reducing our cash burn and channeling our efforts for success in 2024 and beyond. We are accelerating on 10 key development milestones that we will highlight today and preparing for product launch while maintaining tight controls on our expenses.

I will start by taking us through progress on our nearest-to-market products, the VitaGraft kidney and liver lab developed tests and our donor derived cell-free DNA research use only assay. Both VitaGraft kidney and liver have been up for review and coverage decisions at MolDX for a little over a year. We are encouraged by the conversations we are having and the robustness of that review process and we hope to be able to provide an update soon on status for those assays.

On clinical development, we recently published a paper in Kidney International Reports that highlights again the strength of our technology in identifying antibody-mediated rejection, a key problem in post-kidney transplant patient management. This is the second publication that show the reliability of absolute quantification over time, a key advantage of the digital droplet PCR that our assays use.

In Q1, we guided to a Q4 2023 early access launch of our blood-based transplant monitoring assay and I am happy to report that the manufacturing transfer process started in Q2 is on track to meet our goal. We will continue to update you on our progress as we hit the additional milestones that are expected in Q3 and beyond.

Early market access work is preparing us for commercial launch and anticipated start of generating revenue from this important product beginning in the first half of 2024. In line with keeping our cost infrastructures low, we committed to partnering on our commercial channel. Those conversations with strategic platform and distribution partners continue to progress.

VitaGraft kidney and liver have an estimated $2 billion U.S. clinical market opportunity and potential downstream value inflection points to watch out for include obtaining coverage for VitaGraft kidney and VitaGraft liver, a national or global commercial partnership for the RUO product and a manufacturing transfer completion of that same RUO product.

Shifting to our oncology products, DetermaIO LDT continues to build its case as best-in-class measure of the tumor immune microenvironment. We are making progress on the NIH funded SWOG study being run by The Southwest Oncology Group in triple-negative breast cancer.

This study is expected to be completed in late 2023 or early 2024. The data is expected to support our existing application for coverage at MolDX. The review process for our foundation and coverage decision is expected to continue into 2024.

The RUO product is nearing design lock and is showing significant promise for further analytical and clinical development. Just as a reminder, DetermaIO has an estimated $2 billion clinical U.S. market opportunity and the potential value inflection points to watch out for are coverage decision for IO in non-small cell lung cancer and/or triple-negative breast cancer and the SWOG study data publication.

DetermaCNI, our blood-based solution for therapeutic efficacy monitoring, which we believe makes an attractive alternative for researchers that don’t have access to or need to get suppresses tissue since no upfront tumor typing is required.

In Q1, together with UPenn, we presented data at the AACR or the American Association for Cancer Research annual meeting in pancreatic cancer that showed CNI’s ability to distinguish between responders and non-responders. Doctors have two options for treating late-stage pancreatic cancer, knowing that -- knowing if a patient is benefiting from the chosen therapy can give them an opportunity to adjust if needed.

The submission for publication of this data is expected in the second half of this year. Once accepted for print, we plan to submit for coverage under Local Coverage Decision L38835. This is the same LCD that multiple companies have received coverage under in the past several months. Reimbursement for these types of assays has reached into thousands per episode of care and timing on submission is expected to be in the first half of 2024.

DetermaCNI is a greater than $4 billion estimated U.S. clinical market opportunity and the inflection points for that assay include the completed CLIA validation in our Nashville lab, the publication of pancreatic data and submission to MolDX for coverage.

I am going to shift over to the financials. Our consolidated revenues for the second quarter of 2023 were approximately $500,000 and cost of revenues for the second quarter were approximately $200,000, primarily from services for our lab service customers.

Consolidated research and development expense for the second quarter decreased 56% year-over-year from $5.6 million to $2.4 million, driven by our strategic pivot to focus our investment on developing manufactural ver -- manufacturable versions of our assays that we believe are scalable at high contribution margins.

Consolidated G&A expense for the second quarter decreased 35% year-over-year from $5.5 million to $3.5 million, reflecting our successful efforts to reduce spending not directly related to product development or commercial activities.

Consolidated S&M expense for the second quarter decreased 77% year-over-year from $3.5 million to $800,000. We focused our sales and marketing investments on our early access programs and early market access work for our LDTs and scalable RUO products.

Non-GAAP operating loss as adjusted for the second quarter was $4.7 million, a decrease of $6.5 million compared to the same period in 2022. GAAP operating loss as reported for the quarter was $8.3 million, a change of $0.3 million, compared to the loss of $8.6 million in the second quarter of 2022.

For the second quarter, we reported a GAAP net loss from continuing operations of $8.3 million or $1.07 per share, as compared to a net loss of $8.3 million or $1.48 a share for the second quarter of 2022. We have provided a reconciliation between these GAAP and non-GAAP operating losses in the financial tables included with our earnings release.

As of June 30, 2023, we had cash, cash equivalents and marketable securities of $17.9 million. Net cash used in operating activities was $6.8 million for Q2 2023. We anticipate continuing improvement in quarterly operating cash burning levels in the back half of 2023 and are maintaining our guidance to reach a below $5 million in quarterly average burn.

Just as a final comment, the next steps for OncoCyte are gaining reimbursement for our product portfolio, bringing our tests to market to generate revenue growth and we believe we have optimized our product development strategies to support these steps, which we believe have a strong probability of leading to revenue generating external partnerships and licensing.

Our strategy should generate much higher contribution margins than is typically seen at publicly traded diagnostic companies and we believe this is -- the superior commercial strategy combined with our reduced burn puts us on path to financial sustainability.

As a final note, next week we will be presenting at the 23rd Annual Needham Virtual Conference. Thank you.

I will hand the call back to the Operator.

[Operator]

[Operator Instructions] First question will come from Mike Matson with Needham & Co. You may now go ahead.

[Mike Matson, Needham & Co.]

Yeah. Thanks. So, I guess, just to clarify the quarter itself, you said that the revenue was really all from the pharma services part of the business, correct? You didn’t really have any testing revenue in the quarter?

[Josh Riggs, President and CEO]

That’s correct.

[Mike Matson, Needham & Co.]

Okay. And then just with regard to VitaGraft, I mean, when do you think you would -- what’s the earliest you think you could start to generate some revenue from that from either liver or kidney?

[Josh Riggs, President and CEO]

Yeah. I think it all depends on sort of the timing of the coverage decision. There’s usually a couple of months lag between coverage decision and sort of the final reimbursement decision. It have to be really, really quick for us to see revenue this year. So, I would say, it’s either extremely late this year or early next year depending on the timing of that coverage decision.

[Mike Matson, Needham & Co.]

Okay. Got it. And then just the -- it is good to see the big declines in the OpEx. I mean, it’s -- you kind of -- well, you are guiding to the $5 million cash burn -- quarterly cash burn or less in the second half. But the kind of -- are you kind of at the run rate that you are expecting to maintain for the rest of the year for the R&D, sales and marketing and G&A or is that going to tick down a little more in the second half?

[Josh Riggs, President and CEO]

Yeah. I mean, I think, you will see it scale down a bit. I mean in that $6-plus million that we used in the quarter, I mean, there were some one-time expenses. So, yeah, I would say, the run rates are starting to look like what we expect on a go-forward.

[Mike Matson, Needham & Co.]

Okay. Got it. Thank you

[Josh Riggs, President and CEO]

Okay. Sure.

[Operator]

[Operator Instructions] Our next question will come from Nathan Marigo [ph] with Stephens. You may now go ahead.

[Unidentified Analyst]

Hi. Thanks. So for your transplant product, once it’s launched, what does the initial validation work timeline look like for an academic center that’s interested in the product? How long does that last and how should we think about that from a volume ramp perspective?

[Josh Riggs, President and CEO]

Yeah. No. Really, really good question. I can speak to our personal experience. So it took us about three months to transfer the assay from our German lab to our Nashville lab once we had sort of made the decision to bring the assay over.

We have a lot of experience with the assays, so we probably are on the faster end of that spectrum. But I can’t speak specifically to sort of average time lines without sort of having already done it. But that gives you some kind of guidance.

[Unidentified Analyst]

Oh! Yeah. Thanks. Just one for me. Appreciate it.

[Josh Riggs, President and CEO]

Yeah. Sure

[Operator]

It appears there are no further questions. This concludes our question-and-answer session, as well as the conference. Thank you for attending today’s presentation. You may now disconnect.